GINO SA Distribution Channel Analysis

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GINO SA Distribution Channel Analysis

  1. 1. .M600 Case ReportJeevana Jagat Adusumilli
  2. 2. Table of contentsEXECUTIVE SUMMARY 1PROBLEM/OPPORTUNITY 2SWOT ANALYSIS 2ALTERNATIVESAccept Feima as Jinghua’s customer 3Develop Feima as OEM 4Reject Feima 4ALTERNATIVE ASSESMENT 4RECOMMENDATION 5IMPLEMENTATION/ACTION PLAN 5CONTINGENCY PLAN 6Appendix-A 7Appendix-B 8Appendix-C 9Appendix-D 10 Jeevana J Adusumilli | #1192298 | M600 Case report | 2
  3. 3. EXECUTIVE SUMMARY:Gino SA is one of the largest burner manufacturers and exporters in the world and enjoys up to 14%market share with its product mix. The key issue that could potentially grow or break the brand ischoosing between an OEM proposal from Feima and agitating its well-established distribution channel,especially Jinghua. The company further aims to grow its annual unit sales by 20%, industrial sales by200 units, build two OEM & end user channels by improving service standards. After an in-depth analysisinto Gino’s internal and external factors that may influence its strategic goals for the future, the reportidentifies three alternatives that could potentially address all the concerns. Weighing each alternativeacross key factors; investment, unit sales, channel development, brand image, customer service and risksinvolved, it is found that continuing Feima as Jinghua’s customer and offering its requested discount isthe best fit. Since the accepted additional discount will eat into Jingua’s profit margin reducing it by 13%,Gino is suggested to take a 1% hit to its transfer price for Feima account. This brings the company closerto its annual unit sales goal.The distributor channels are aligned by implementing a service charge as apercentage of public prices of industrial, commercial and spare parts to increase their revenue by 3.6%and profit margin by 3%. This new fee, along with a customer feed back component will be implementedon purchases made from March 2000. The plan optimizes the existing channel, reduce its power but alsoinstigate service standards, spares stocking and motivated industrial unit sales. It also attracts OEMchannels, which base their purchase decision on availability of spares and service. To reduce the cycletimes that may have forced Gino to lose industrial sales, it will open a warehouse in South China andemploy a sales force of 36 individuals that work toward acquiring new channels, increasing unit sales andpromoting the brand image. The plan aims to achieve its aim by December 2000. In the event that Ginofails to achieve its unit sales by August by more than 20% and distributor shirking continues, thecompany moves toward contingency plan. Where distributors will be offered product volume discountsand sales force assigned new sales targets. With the new push strategy, the regional sales managers will Jeevana J Adusumilli | #1192298 | M600 Case Case Report M600 report | 3 Jeevana J Adusumilli | #1192298
  4. 4. closely monitor sales performances to ensure Gino’s success.PROBLEM/OPPORTUNITY:The impending issue concerning Gino SA is the choice between Feima’sOEM businesses, which may lead to frayed relationship with existing distributor, Jinghua that constitute40% of revenue in China and Fiema as Jinghua’s.In the event that the company chooses to accept thisproposal Gino SA needs a pricing strategy for potential OEM’s including Feima. Although Jinghua is notbelieved to leave Gino SA, any action that Zhou may perform is bound to influence Gino SA’s brandequity and recognition in the market andother distribution channels that it plans to build further in thenext three years.Further the company aims to open two OEM accounts, develop more distributors andassist through marketing and technical support, increase annual industrial burner sales to 200 units, andover all sales to 15,000 units. IMPORTANCE Low High Increase Industrial Sales Low URGENCY Increase overall unit Sales Improve service and spare supply Develop OEM channel High Feima Proposal Optimize Distributor channel Build brand imageSWOT ANALYSIS:Strengths Gino SA benefits from global presence, well-established channel network and strong brandreputation. In-house production capability adds to the competitive advantage for the company to enjoy asubstantial price gap from competition of up to 30%and significantcontribution margins (30% - Industrial,25% - Commercial, less than 20% - Domestic).The company also sustains a 14% domestic range marketshare. As one of the largest burner manufacturers and exporters, Gino SA banks on reputable employeebase(technical and marketing) that is motivated by its compensationstructure.WeaknessesExcessivereliance on oligopolistic distribution channel for meeting the sales targetsleaves Gino SA with little to no power in managing its product flow and after sales services.Shirking Jeevana J Adusumilli | #1192298 | M600 Case report | 4
  5. 5. amongst distributors in stealing sales from other provinces and reluctance to stock Industrial burners isleading to an opportunity loss of at least 50 units.OpportunitiesIncreasing demand (20% higher in thenext five years) in Industrial range has remained an unexploited market for Gino SA despite lowercomparative offering price (10-20%) due to lack of brand image in the segment.ThreatsPolitical influenceof local manufacturers leading to increased output and selling power may lead to reduced profit marginwithin the next five year time period. Declining growth in western markets forces Gino SA to bank ondeveloping markets like China to meet the sales targets.ALTERNATIVES:1. Accept Feima as Jinghua’ customer: This alternative proposes to continue Feima as a distributorscustomer with new pricing(appx-b). This allows Gina a 2% increase in profit margin, and brings it closer toachieving the unit sales volume budget including industrial burners for the next three years. In order toaddress reduced Jinghua’s profit margin to 4%, Gina will offer the additional discount through reducingthe transfer prices for Feima account by 1%. Further issues concerning distributor channel conflicts, aservice fee of 5% (of commercial, industrial& spare public price) for appointments, which includeburners post warranty (one year), installation and start of commercial and industrial burners added tocontract pricewould be implemented. This will further increase thedistributor’s revenue by 3.6%(appx-a)asopposed to revenue being lostdue to excessive contract discounts and encourages industrial andcommercial products. This further increases services standard& spares stocking in the channel. Gino willsupplement its existing channel with a penetrating sales force to attract OEM’s bypromoting its productsat design institutes and trade shows. Focusing on the industrial segment, the company will establish awarehouse in the Southern part of China assisting major industrial market handled by Wayip, whichaccounts for 38% of Gino’s industrial sales to compensate for stocking issues.Gino will continue toleverage its current brand image as well as acquire new accounts.Advantages:Increase in unitsales.Relationship with distributors strengthened.Improved service standards. Industrial burners Jeevana J Adusumilli | #1192298 | M600 Case report | 5
  6. 6. emphasized. New OEMaccounts. New distribution channel established. Reduced cycle time.Decreasingpower of distributors.Disadvantages: Loss of potential OEM. High investment.2. Develop Feima as OEM:With this alternative Feima will be developed as an OEM with its proposedpricing, since it is a leading boiler manufacturer in Northern China and constitutes major portion ofrevenue in that area.This increases Gino’s profit margin by 2%. A slab based price mix is introduced forall potential OEM’s (appx-d)to ensure OEM referencing in the future. In order to compensate for thedistributor dissatisfaction, a service fee will be implemented as in alternative 1 thatincreases their revenueby 3.6%. Also Gino will supportits existing channel with an integrated advertising campaigntargeted atindustrial burners to create a brand image through global consumer culture positioning.Advantages:Increased unit sales through Feima. Brand image andpotential end-user channels built. New OEMchannel developed. Decreasing distributor power.Disadvantages:Disappointed Jinghua. Fear indistributor channel may lead to poaching and exits. Industrial stocking remains a challenge.Highmarketing investment.Longer cycle times.3. Reject Feima:Under this option, Feima proposal will be rejected to ensure distributorchannel’scooperation. But an in-house sales force will be developed that will concentrate on acquiringOEM’s and end users through design school presentations and tradeshows.Further, a warehouse will beestablished in Southern part of China to encourage industrial sales across the country. Gino will remain asa budget manufacturer leveraging its current brand perception. Advantages: New OEM and end useraccounts. Relationships with distributors remain undeterred. Industrial segment sales promoted.Shortened cycle time.Disadvantages: OEM account lost. Guaranteed unit sales lost. Distributor powerremains. High investment.ALTERNATIVE ASSESSMENT:The alternatives are weighed across investment, unit sales, brandimage, customer service, channel development and risk factors. Investment defines cost of upfront capital(including warehouse, marketing and sales force expenses). Unit sales define the comparative projectedincrease in units towards meeting the company sales targets. Brand Image contributes to the unit sales by Jeevana J Adusumilli | #1192298 | M600 Case report | 6
  7. 7. positioning Gino as a culturally associated, budget product in domestic and a reliable brand in itsindustrial segments. Further customer service takes spare parts and technical assistance into accounttoward escalating distributor revenue and future sales for OEM channel and industrial products. Channeldevelopment weighs contribution of each alternative into efficiently diversifying Gino’s distributionchannel.Risk factor takes into account the possibility of fraying distributor relationships due to thedecision made in the designated alternative.RECOMMENDATION: Alternative 1 Alternative 2 Alternative 3 Decision Weights (Accept Feima as (Develop Feima as Criterion (Reject Feima) Jinghua’s customer) OEM) Investment 0.1 2 3 3 Unit Sales 0.2 5 4 3 Brand Image 0.1 3 4 3 Customer Service 0.2 5 5 1 Channel dev. 0.2 3 4 3 Risk 0.2 5 1 5 Total 4.1 3.1 2.8Alternative 1poses to be the most strategic fit for the current situation and future corporate goals of Gina.Despite the high capital warehouse and sales force expense (appx-d), this alternative is bound to motivateexisting channels to build new OEM and end user channels with Gino’s in-house sales force and promotespares sales/stock and service. Which further structure consumer confidence in the brand leading todevelopment of industrial segment. In addition a warehouse built in Southern China, which accounts for26% profit margin and 38% of industrial sales as opposed to Central China with 35% industrial unit salescontribution(appx-a), will ensure stocking with most profitable product mix for Gino to invest in. The riskof disturbing the existing distribution channel being negligible, this plan ensures increase in unit salesthrough Feima and new channels underway bringing Gino closer to its sales targetswith additional 28industrial and 1299 commercial/domestic to be sold annually(appx-c) in order to meet its target.IMPLEMENTATION/ACTION PLAN:The implementation is carried out in 2 phases(appx-c).Phase 1: This phase will last from March toJuly.During first month, Feima will be issued the additional discount and distributors, a new contract of Jeevana J Adusumilli | #1192298 | M600 Case report | 7
  8. 8. service charge to be implemented for new purchases starting March 2000. This ensures distributorsatisfaction and further a customer feedback component with each service (form to be mailed to Gino) isadded which allows Gino to recognize any technical or service issues the customers mayincur during theappointment. A sales force of 36 individuals (9 per region) is recruited and field trained. The warehouseestablishment procedure is underway in this period. From Aprilto Julythe sales force is assigned salestargets of 1299 units of domestic/commercial burners and 28 industrial burners, which is the differentialamount to reaching the annual unit sales target.Sales teams will approach design schools and trade showsto pitch their sales with a fully functional warehouse setup by June. This phase ensures the stocking ofindustrial burners and further in assisting the regional distributor in reducing cycle times and increasingsales.Phase 2: In the end of July, sales force performance and distributor service standards are assessed.Necessary adjustments to the sales targets and distributor service contract are made. This will compensatefor anydiscrepancies in unmet roll over sales targets from the previousperiod. In the next five months thepush strategy will continue and periodic feedback is collected to track progress. An assessment of salesperformance is conducted in the end of December.CONTINGENCY:Contingency plan(appx-c) comes into force at the end of July 2000 in the event that the sales targets aremissed by more than 20% and distributor shirking continues despite the service fee contract. This planbanks on increasing the existing sales force by 9 new individuals, expanding each region to 12 membersin the first one-month. The push strategy continues, with monthly sales budgets (of 520 (1560total)commercial/domestic burners and 12 (36 total)industrial burners per region)as opposed to annual and aquarterly review by Sales managers of the concerned regions. Also, inorder to motivate the sales staff,commission based compensation system is introduced to ensure unit sales.Distributor dissatisfaction willbe addressed with a volume-based discount on transfer price(appx-c). The volume scales are structured toencourage distributors to sell more as well as avail the discounts on their current sales performances. Thecontingency plan promises Gino SA in reaching its corporate goals in the remaining short period. Jeevana J Adusumilli | #1192298 | M600 Case report | 8
  9. 9. Appendix-A Jeevana J Adusumilli | #1192298 | M600 Case report | 9
  10. 10. Appendix-B Jeevana J Adusumilli | #1192298 | M600 Case report | 10
  11. 11. Appendix-CImplementation/Contingency plan:Phase Timeline Objectives 1 March • Announce and implement service charges for all future accounts 2000 • Form sales force of 36 by region (9*4 regions) (1 month) • Launch warehouse establishment in Southern China • Sales force training with targets for each region being 1299(433 per region) commercial/ domestic & 28(10 per region) industrial burners, 1 OEM & 1 end user account per region. Apr-Jul • Fully operational warehouse to stock all segments (June) (4 months) • Sales force presentations in design schools and tradeshows. • Collect periodic feedback from customers through sales force • Asses sales force and distributor performance • Analyze feedback from customers and distributors 2 Aug-Dec • Form new targets if necessary (5 months) • New service contract if necessary • Continue push strategyContingency Aug • Form new targets (of 520 (1560 total) commercial/domestic burners (1 month) and 12 (36 total) industrial burners per region) • Recruit 10 new sales members and assign new targets • Announce volume discounts for all distributors Aug-Dec • Asses sales force and distributor performance (5 months) • Analyze feedback from customers and distributors • Monthly review of sales performance by sales manager • Continue push strategyProposed Contingency discounts for distributorsProduct Range Target Price Dealer Gino Price DiscountDomestic 1-4000 301 301 0% 4000-4500 301 286 5% 4500-5000 301 271 10% Above 5000 301 256 15%Commercial 1-900 1084 1084 0% 900-1300 1084 1030 5% 1300-1600 1084 976 10% Above 1600 1084 921 15%Industrial 1-15 7831 7831 0% 15-20 7831 7439 5% 20-30 7831 7048 10% Above 30 7831 6656 15% Jeevana J Adusumilli | #1192298 | M600 Case report | 11
  12. 12. Appendix-DProposed OEM pricingProduct Range Base Price OEM Gino Price Mark-upDomestic 1-750 3,708 4,450 20% 750-900 3708 4252 15% 900-1050 3708 4079 10% Above 1050 3708 3896 4%Commercial 1-40 13355 16026 20% 40-60 13355 15358 15% 60-80 13355 14691 10% Above 80 13355 14028 4%Industrial 1-15 96478 115774 20% 15-20 96478 110950 15% 20-30 96478 106126 10% Above 30 96478 100337 4%Ware house expensesCost Year 1 Year 2Setup cost $200,000 0Operation $360,000 $360,000Capacity $5,000,000 $5,000,000Expected Rev* 5560000 5560000Gross Margin 720,000 920,000* Computed assuming Gino will reach its 15000 annual sales targets Jeevana J Adusumilli | #1192298 | M600 Case report | 12

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